The stigma associated with MLM comes from its close resemblance with illegal pyramid schemes. Such schemes require recruiting people to not only buy and sell the product, but also to recruit other people who will not only have to buy and sell the product but also recruit people...ad infinitum. Each recruitment or sale earns the member a commission, and a portion of such commission.
Illegal pyramids and Ponzi schemes use the same structure, but unlike genuine MLM the major activity and source of commission is recruiting members rather than selling products. Many ponzi and pyramid schemes disguise themselves as MLMs by offering products for sale, but revenue coming from recruiting members and members buying a certain quantity of products or paying a fixed membership fee. In such cases, the company entices recruits to buy more products than they can sell, often at inflated prices, to earn incentives. When this occurs throughout the chain, people at the top of the pyramid reaps substantial profits, but little or no product moves to market or to actual end users and the people at the bottom who make the actual payments find inventory accumulating in their houses. Sales among people inside the pyramid structure or to new recruits joining the structure, rather than to the public, are sure tell-signs of such frauds.
Part of the stigma comes from the very structure. Even when concerned with the legitimate selling of products, the structure is unsustainable beyond a certain level. At some point, the ability to recruit more members ends, and the scheme collapses. When such collapses occurs, most people in the chain, except those at the very top of the pyramid, end up empty-handed.
The United States Federal Trade Commission (FTC) cautions the public to stay clear of multilevel marketing plans that pay commissions for recruiting new distributors, regardless of whether they offer products for sale. The FTC clarifies that the test of the legality of an multilevel marketing activity is the commissions to participants coming from sale of goods and services, rather than such sale-based revenues being incidental to the purchase of the right to participate in a moneymaking venture. In other words, if the prospects of income from the scheme depends more on the number of distributors recruited rather than sales to such people, or sales to people outside the plan, then the scheme is a fraud in nature.
Good companies place emphasis on selling the actual products -- especially to outside customers, and consider recruiting new members only as a means to drive sales, rather than as an end in itself.